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Mysteries of a Compliant Accounting System. Breakout Session # WC10-707 Melanie Burgess, CPA Sr. Consultant, Cherry, Bekaert & Holland, L.L.P. [email protected] Monday, July 19, 2010 2:00-3:15 pm . 1. Objectives. Requirement for adequate systems General data requested Preparing for audit

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Mysteries of a Compliant Accounting System

Breakout Session # WC10-707

Melanie Burgess, CPA

Sr. Consultant, Cherry, Bekaert & Holland, L.L.P.

[email protected]

Monday, July 19, 2010

2:00-3:15 pm

1


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Objectives

Requirement for adequate systems

General data requested

Preparing for audit

Real world stories

Proposed rule

Closing remarks


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The Myth

“Approved” Accounting Systems


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The Truth

“Adequate” Accounting Systems

Based on contract type and requirements

FAR 16.301-3 – adequate to determine costs applicable to cost reimbursement contracts (no FAR requirement for T&M or FFP contracts)

FAR 9.103 – KO must determine responsibility IAW FAR 9.104-1

May request a pre-award survey (FAR 9.106)

No longer adequate in part – either adequate or inadequate


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When are Audits Conducted?

Prior to award of cost or T&M type contract

After award of contract to verify system functioning properly

If accounting software changes

Mergers and Acquisitions


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Why We Should Care

Contracting Officers use audit report to help determine contractor responsibility

Negative report may result in not winning cost type or T&M work

Both Government and Prime contractors are asking contractors to certify whether or not system(s) are adequate


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Accounting System Defined

Software

People

Processes

Policies


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Basic Requirements

Segregation of Duties

Written policies and procedures

Method to consistently allocate costs

Identify costs by project

Software is a tool to accomplish this


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Size Matters

Compliant system varies by company size

1 man shop requires little controls or written policies

1000 person company needs segregation of duties, employee training, written policies


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Requested Data

Chart of Accounts

Trial Balance – in accrual; ties to all subsidiary reports

May also request G/L

Financial Statements

Project Report(s)

Organization Chart

List of government contracts


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Requested Data, contd.

Policies and Procedures

Timekeeping

Billing

Indirect Rates

Budgeting

Segregating costs (emphasis on unallowable)

Survey of Contractor’s Organization


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Preparing for Audit

Always be audit ready

Expected to provide info quickly (see MRD from 12/19/08)

Request audit number & name

Review audit program to understand scope

Pre-award Survey of Prospective Contractor Accounting System – Activity Code 17740

Standard Form 1408


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Preparing for Audit, contd

Written description of basic account structure

System used (Deltek, QuickBooks)

Identify pools and bases for indirect rates and how to identify within the chart of accounts

Define company’s allocation methods and indirect cost pools

Overview only – may only be a few pages


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Preparing for Audit, contd

Reconcile all reports and correct variances or have a thorough explanation available prior to audit

Select a variety of timesheets

self-audit that timekeeping procedure was followed and time properly recorded in accounting system

Identify contracts with special accounting/billing requirements and verify contract terms followed (75% notice)


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Surprises

Post Award Accounting System Audits

Pre-award Survey – conducted again?

But everything was fine in the last audit

Proposed change to DFARS

Potential for withholding if systems are inadequate


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Post Award Accounting System Audit

Scope: adequate system to segregate and bill costs IAW contract requirements

Not designed for overall accounting system review

Not testing internal controls

May be requested by Contracting Officer or follow-up to pre-award


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Real World Examples

Was adequate, now it’s inadequate

Special requests

Written policies

Timekeeping

Fully utilizing accounting system

New business


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Adequate to Inadequate

Accounting System: Deltek FMS

Revenue > $20 million

Original pre-award audit deemed system adequate

Several years later, updating with a post award audit

System deemed inadequate

Significant issues:

Lack of billing policies and procedures

Lack of training on proper billing procedures

Billings not based on current accounting information

Not reconciling booked to billed costs

Not excluding unallowable costs (travel)


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Adequate to Inadequate, contd

Contractor Response:

Develop policies and procedures to exceed DCAA’s recommendations

Hire additional accounting staff

Develop training plan

Revise method to calculate invoices

Revise expense reimbursement policy

Hired consultant to assist with project reconciliations and P&P development


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Adequate to Inadequate, contd

Results

Regular visits with DCAA to track progress

Meetings with customers to assure of contractor’s capabilities/responsibility

High cost in labor and time to correct

Follow-up audit conducted

Received notice of adequate system 1 year after initial audit began


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Prime & KO Request

Accounting System: Peachtree

Revenue > $10 million

Prime contractor questioned propriety of subcontractor cost allocations

IG investigated subcontractor and found no improprieties

Subcontractor awarded large prime contract - cost reimbursable

KO read article on IG investigation and asked DCAA to perform accounting system survey

System found inadequate

Different KO received report and stated no renewal of cost contract


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Prime & KO Request, contd

Negotiated with KO to receive FFP contract

Significant issues

Inconsistent treatment of fringe benefits as direct or indirect cost

Mistake in presentation on the ICS

Non-segregation of costs by contract type within a contract

Accounting system is capable of this

Setup corrected

Indirect costs not billed using provisional billing rates

Misunderstanding on ability to revise provisional rates

Indirect rates not adjusted to actual year end rates

Creating policy to make interim billing adjustments


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Prime & KO Request, contd

Results

Incurred cost submissions amended and accepted by DCAA

Negotiations with customers to award FFP contracts or extend current contracts

Large expense in time and money to resolve

DCAA returned to review accounting system

KO requested specific invoices be reviewed

Debate on accuracy of invoices

Adequacy of accounting system withheld pending result of billing system

Not resolved after 15 months


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Policies & Procedures

Accounting System: Solomon

Pre-award survey conducted

Contractor activities were adequate

Lacked written policies & procedures – inadequate system

Contractor put everything in writing within weeks

DCAA not to return for 6 months to have sufficient data to test

Contractor lost two contracts as a result of report


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Policies and Procedures, contd

DCAA returned and found directly associated unallowable costs that were not segregated

Maintained system was inadequate

As of March 2010, system still inadequate (9 months after initial report)


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Timekeeping

Accounting System: Deltek Costpoint

System found inadequate for not recording time in and out

No requirement to record this information

Until contractor can overturn this decision, remains on record and can affect future awards


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Accounting System Features

Accounting System: Deltek Costpoint

Significant Issues

Not segregating unallowable G&A travel

Not maintaining adequate contract briefs

Contractor Response

Hired a consultant to review segregation of unallowable travel after adjusting system

Prepared contract briefs in Word format following Schedule S

Hired a consultant to review briefs against contracts

Consultant wrote report on procedures and results

Letter provided to KO

DCAA returned and deemed system adequate (took 6-8 months)


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New Business

Accounting System: QuickBooks

Pre-award survey prior to award of SBIR contract

Revenue size < $1 million

Redesigned chart of accounts prior to audit

Improved policies to be more clear on timekeeping and payroll

Improved company handbook

Developed a policy on segregating unallowable costs

Provided DCAA with organized package of info requested

Explained why some items were not applicable

Adequate system and promise that there will be a follow-up audit to ensure system working


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DFARS Case 2009-D038

Acceptable business system rule

Mandatory - Withhold payments – up to 50%

Interim payments

Cost reimbursement

Incentive type

T&M

Labor Hour

Progress payments

Performance-based payments

No exception for commercial contracts


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DFARS Case 2009-D038, contd

Systems involved

Accounting

Estimating

Material Management & Accounting

Purchasing

Earned Value Management

Property Management

Public Comments closed; committee report due July 28


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Final Remarks

Don’t assume system is adequate

Continuous improvement

Consider expert advice

Before audit

During audit

Upon receipt of draft report

Mock audit(s)



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